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Protecting your cash flow: Do you need business income insurance?

If you're a small business owner, you know cash flow is king. If you can't pay your employees and other expenses, you'll soon have to close up shop. So if your company is destroyed in a disaster, such as a fire or a tornado, could you keep things running during the rebuilding process? If the answer is "no," you're a good candidate for business income insurance, also known as business interruption insurance.

When small-business owners can't work, they typically won't collect any income. Business income insurance is designed to compensate for that.

business income insurance Why business income insurance?

A policy would provide your business with income to cover your ongoing expenses while the business's operations are suspended, says Mitch Smith, a broker with Crane Insurance in St. Louis and author of Insurance: A Big Decision for Small Business. This insurance also would cover profits that your company would be making had the disaster not occurred.

Without business income insurance, your small businesses might not be able to survive a temporary shutdown because:

  • Your business might lose clients to a competitor if it doesn't have the money and resources to meet those clients' needs.
  • Your business might not be able to pay employees, so valued workers would be forced to find employment elsewhere.
  • Your business might lose important partner relationships if you can't pay vendors in a timely manner.

Business income insurance can also come in handy when companies you depend on experience disasters.

Say you have a major supplier that you can’t do business without. If that company suffers an emergency and is temporarily unable to get supplies to you, your business would be impacted. A business income policy might cover you for the financial loss that your business would take during that period.

Business income insurance: How it works

The longer your business is unable to operate, the more valuable a business income insurance policy is. Typically, business income insurance provides coverage until the workplace is rebuilt or restored, or for 12 months after the disaster -- whichever comes first.  

There may be a monthly limit option in place, which designates a maximum amount that a business owner could collect in a given 30-day period.  

Many insurers, such as Nationwide Insurance, include business income insurance in their standard business owner's policies (BOP). Such general business policies also typically include property damage and liability coverage.

Another type of coverage that typically comes with business income insurance is extra expense insurance. This coverage provides money to help you avoid shutting down the business entirely during the rebuilding process.

For example, extra expense insurance might pay for the business to rent another space temporarily while the business is being restored.

How much business income insurance do I need?

Determining how much business income insurance you need can be tricky because "what you're basically doing is guessing what your profit and continuing expenses would be if you hadn't had the loss in the first place," Smith says.

Your insurer typically will check your records to see how much money your business is likely to bring in during a given period of time.

How much does business income insurance cost?

The cost of business income insurance varies and can range anywhere from $750 per year to $10,000 or more, according to industry estimates. When determining a rate, insurers typically look at the amount of revenue the business makes each year. Then they consider the costs of operating expenses and the expected time it would take to get the business back in working order.

The business's location is also a consideration, says Ron White, commercial property claims director for Nationwide Insurance. 

For example, if a fire destroyed a business during the winter, weather conditions might delay the rebuilding process in a northern state while the rebuilding process might be able to start immediately in a warmer, southern state, White adds.   

Finally, the type of business might impact the rate. For example, a restaurant might have a higher risk of a fire on the premises than a real estate agency, according to the Insurance Information Institute. Business income insurance might cost more for the restaurant because of that added risk.

Some businesses might need less business income insurance if employees could do certain tasks during the rebuilding process. For example, a technology consultant who works on-site at his or her clients' establishments would be able to keep working even if his or her storefront burned down.

It's important to note that some perils, or types of disasters, aren't covered by business income insurance. For example, many policies don't cover earthquakes, so if your business is destroyed in one, your business income coverage wouldn't kick in.

When making a decision about business income insurance, a business owner should consider the long-term effect a disaster could have on a company.

Any small business that cannot afford to be shut down because of physical loss or damage to their property should consider business income insurance, White says.

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